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Friday, September 3, 2010

Brown Hangs Tough

Brilliant bit of cross-market analysis at by Chris Mercer (subscription-only, sorry) on Pernod's situation vis-a-vis the market analysts' slapping of them for their positions on debt and portfolio. The analysts want them more in "white goods" (vodka, light rum, and to a lesser extent, gin) which, the conventional wisdom goes, are more recession-resistant.

Mercer points out that Pernod's actually doing just fine with brown goods, thank you.

"In Jameson and Martell, the drinks giant has found two brands that have expanded its reach and made a mockery of weak consumer confidence. Asia's thirst for premium Cognac drove a 12% rise in net sales for Martell Cognac during Pernod's fiscal year, to the end of June. At the same time, the firm managed to round up enough consumer spending power in the US to achieve a 12% increase in global value sales of Jameson Irish whiskey... No wonder the firm is planning to expand storage capacity for Jameson in its native Ireland."

Suck on that, vodka. In fact...

"Its final dividend proposal is also the biggest for five years, at EUR1.34 per share. In short, early market jitters have hidden several reasons for Pernod to be cautiously cheerful."

...suck on that, analysts. I really wonder sometimes if the market analysts know anything about the actual industry they follow.

(Yeah, I realize that I know nothing about EBITDA and ROI and P/L ratios; I figure that makes us even. What they need is someone who knows both...or a team. Ahem...I'm available.)


Chuck Cowdery said...

Analysts, despite their claims to the contrary, tend to look at one thing at a time and not the whole picture. A company that is already solidly established in brown goods has a huge competitive advantage because there is such a high barrier to entry in that segment, whereas any joker can put a new vodka on the market tomorrow.

jp said...

little bit of a straw man there Lew . The street has been actually bullish on Pernod over the last 2 years. Looking at recommendations for Pernod over the last 24 months the majority (almost 80% of analysts who cover Pernod) have an outperform or in line rec on the name which has out performed over that period so not sure how they are getting it wrong.

Lew Bryson said...


I may need to edit this. What I was looking at was actually Matthew Curtin in the WSJ, summarizing analysis.

"investors will discern the odd imperfection, including slower-than-expected progress on debt reduction, weak links among its top brands, and too much exposure to Europe's sluggish economies. Until they are eliminated, a premium rating for Pernod shares looks unlikely.
...[including a note that Martell and Jameson are doing well]...
But with the shares trading at 13 times estimated 2011 earnings, broadly in line with the sector, and having outperformed arch-rival Diageo this year, the good news is in the price. Risks remain.

Although tight control over advertising and promotion costs has put Pernod ahead of its free cash flow target, net debt remains stubbornly high at 4.9 times earnings before interest, taxes, depreciation and amortization, or Ebitda, compared with 5.3 times at end-June last year. That said, Pernod still has ample time to refinance E7.6 billion in debt maturing in 2013 and 2014, its next major repayment." Chris said, jitters, I guess. And maybe I have a tendency to beat up analysts because I've seen them miss trends in drinking in the past (and want to perpetuate trends that have already sailed, like the persistent calls for A-B to 're-focus' on their core Bud Light market). As I said, may have to edit this one. Thanks for keeping me honest.

jp said...

oh, gottcha. Those Asian sales are hard to Predict but it is totally true they love Conganc. Another debate out there that I think a lot of Analysts are missing at least in my opinion, was/is the shift away from premiumization which most analysts seemed to think was just a temporary event now seems to be more structural in Norht America and European on-premise sales

Lew Bryson said...

I'm seeing that shift too (wrote about it in my Mass Bev Biz vodka story in the spring; vodka continues to grow, but there's a lot of discounting and downward price adjustment happening to support that), but not in every category; again, brown spirits look to be holding up better than white goods. That said...Evan Williams is up 13+%, and that's got to be people trying something less expensive and finding that it's actually pretty damned good. That's taking share.